Sarah is a content and copy writer with a background in merchant banking. She has a passion for putting technical language into plain English and is a contributing writer for Sprintlaw.
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Ending an employment relationship is rarely straightforward. Even when both sides agree it’s time to move on, questions about the notice period, final pay, and whether the employee needs to work out their notice can get messy fast.
One common solution is payment in lieu of notice (often shortened to “PILON”). It can be a practical way to end employment quickly while still meeting your obligations.
This guide is current and reflects how employers and employees are dealing with notice periods in New Zealand right now, including the compliance focus we’re seeing around correct final pay calculations and well-documented termination processes.
What Is Payment In Lieu Of Notice?
Payment in lieu of notice is when an employer pays an employee for all (or part) of their notice period instead of requiring them to work it.
In plain terms, it usually looks like this:
- The employer ends the employment now (or on an earlier date), and
- The employee receives money equivalent to what they would have earned if they worked through their notice period.
Payment in lieu of notice often comes up when:
- There’s a breakdown in the working relationship and it’s not practical for the employee to stay at work.
- The business needs to restructure and wants a clean, quick end date.
- The employee is leaving for a competitor and the employer wants to protect confidential information or client relationships.
- The parties agree to separate on mutually acceptable terms.
While PILON can be an efficient option, it’s not something you should treat as a “default” exit. In New Zealand, the safest approach is to make sure any payment in lieu aligns with the employment agreement and a fair process (because process is often where disputes start).
If you want a quick explainer first, this payment in lieu of notice guide is also a handy reference point.
When Can An Employer Pay In Lieu Of Notice?
Whether you can pay in lieu of notice (and do it safely) depends on what your employment agreement says and what’s happening in the termination.
1. Check The Employment Agreement First
Many New Zealand employment agreements include a clause allowing the employer to:
- require the employee to work their notice period, or
- pay the employee instead of having them work the notice period.
If your agreement includes a PILON clause, that’s usually the cleanest path. If you’re not sure whether your contract covers this properly, it’s worth reviewing your Employment Contract wording before you rely on it.
2. If There’s No PILON Clause, You’ll Usually Need Agreement
If the employment agreement is silent on payment in lieu, an employer can’t automatically assume they’re entitled to terminate immediately and simply “pay it out” as a substitute.
In practice, you may still be able to pay in lieu if:
- the employee agrees (ideally in writing), or
- it forms part of a broader separation arrangement that both sides sign off on.
This matters because if you terminate immediately without contractual authority (or agreement), you can create arguments about breach of contract or an unfair process.
3. Payment In Lieu Doesn’t Replace The Need For A Fair Process
A common misconception is: “We’ll just pay notice, so we can end things instantly.”
But in New Zealand employment law, the process and justification for termination are still critical. Payment in lieu might satisfy the contractual notice requirement, but it doesn’t automatically protect you from a personal grievance if the dismissal was unjustified or carried out unfairly.
That’s why it’s important to treat termination as both:
- a contract issue (what does the agreement require?), and
- a process issue (was it handled fairly and reasonably?).
If you’re working through a termination and want a practical roadmap of what fair process can look like, How to terminate an employee is a useful starting point.
How To Calculate Payment In Lieu Of Notice (And What Must Be Included)?
The right calculation depends on what the employee would have received if they worked their notice period as normal.
In most cases, payment in lieu should reflect the employee’s ordinary pay for the notice period (and may need to take into account their usual hours, pay cycle, and agreed benefits).
What Usually Gets Included
While every situation is a little different, PILON calculations commonly include:
- Base salary or wages for the notice period.
- Regular hours the employee would normally work (especially relevant for part-time employees with consistent rosters).
- Allowances that form part of ordinary pay (for example, a regular and guaranteed allowance).
- KiwiSaver employer contributions (depending on how remuneration is structured and how your payroll is set up).
- PAYE and other standard deductions (PILON is generally treated as taxable employment income).
In other words, it’s not usually a “bonus payment” or an ex gratia amount. It’s typically treated as wages you would have earned during the notice period, paid out in a lump sum.
What Might Need Extra Attention
Some parts of remuneration can be tricky, and this is where employers often get caught out:
- Commission or incentive payments: are they guaranteed, or conditional on being employed on a future date? The employment agreement wording matters a lot.
- Overtime: if overtime is genuinely regular and predictable, you may need to consider whether “ordinary pay” should reflect that.
- Benefits: things like car allowances, phone allowances, or private health insurance can raise questions about whether they continue through the notice period (or whether they’re paid out/compensated).
A practical way to think about it is: what would the employee have received if they worked to the end of the notice period? That’s the benchmark you’re often trying to match.
Don’t Forget Final Pay Items Separate To PILON
Payment in lieu of notice is only one part of the final pay picture. Depending on the circumstances, final pay may also include:
- salary or wages up to the termination date
- accrued (but unused) annual holidays
- any alternative holidays owing
- any outstanding reimbursements (if you have a policy or practice of reimbursing certain costs)
If you’re an employer, it’s worth treating final pay as a checklist item and documenting what you’ve included and why. If you’re an employee, asking for a breakdown (politely but clearly) is completely reasonable.
Common Scenarios Where Payment In Lieu Of Notice Comes Up
Payment in lieu can show up in lots of different “exit” situations, but the risks (and best approach) vary depending on why employment is ending.
Redundancy And Restructures
In a restructure, employers sometimes prefer to end employment sooner rather than having employees work through their notice period (particularly where roles are disestablished, workloads are changing, or it’s emotionally difficult for teams).
PILON can be an option here, but redundancies in New Zealand come with their own expectations around consultation and good faith. Payment in lieu doesn’t remove the need to run a fair process.
If you’re managing a restructure and want to reduce the risk of disputes, getting advice early is key. This is exactly where Redundancy advice can save you time and stress later.
Performance Or Misconduct Processes
Sometimes an employer reaches the end of a performance management process and decides to terminate. Other times, misconduct issues arise and the employer wants the employee out of the workplace immediately.
Two important points here:
- PILON is not the same as summary dismissal. If you’re dismissing without notice for serious misconduct, you generally wouldn’t be paying notice (but the threshold is high and the process still needs to be fair).
- PILON doesn’t “fix” a flawed disciplinary process. If the employee didn’t get a fair opportunity to respond, or the outcome was predetermined, paying notice won’t necessarily prevent a personal grievance.
This is one of those areas where it’s worth slowing down and getting tailored guidance, even if the workplace situation feels urgent.
Employee Resignation (And Paying Out The Notice Period)
Employees usually need to give the amount of notice required by their employment agreement.
But what if the employee resigns and the employer doesn’t want them to work out their notice?
In many cases, the employer can accept the resignation effective immediately and pay out the notice period (if the agreement allows, or if the parties agree). This can be useful where there are confidentiality concerns, or where it’s best for team dynamics to have a clean break.
Just keep in mind that a resignation is still a contractual event. If you change the end date, document it clearly in writing so both sides are on the same page about:
- the final day of employment
- whether notice is being paid out and how it was calculated
- what happens to benefits and access to systems
Settlement Agreements And “Without Prejudice” Exits
Sometimes both sides want to part ways quickly, but there are disagreements about what should be paid, what should be said to clients, or whether there will be any claims after termination.
In those cases, payment in lieu of notice may be bundled into a broader settlement amount, alongside:
- final pay components
- a confidentiality commitment
- an agreed reference or statement of service
- a record that claims are resolved
These arrangements are often documented in a Deed of Settlement, which helps both parties move forward with more certainty.
Practical Tips To Get Payment In Lieu Of Notice Right (For Employers And Employees)
Payment in lieu can be simple in theory, but the detail is what makes it legally safe and commercially clean.
If You’re An Employer
- Check the contract first. If your employment agreement doesn’t clearly allow PILON, consider getting agreement in writing before you act.
- Be consistent and document your decision-making. If one employee is paid in lieu and another is required to work their notice, have a clear reason for the difference.
- Confirm what’s included in the calculation. Don’t guess on commissions, allowances, or benefits. If you’re unsure, get advice.
- Separate process from payment. Even if you pay notice, you still need a fair and reasonable termination process.
- Handle handover and access carefully. Plan return of company property, passwords, devices, and system access as part of your exit checklist.
If you’re reviewing how your business manages exits generally, it can be worth speaking with an Employment lawyer to sanity-check your contract terms and offboarding process.
If You’re An Employee
- Ask for the breakdown. It’s okay to request a clear calculation of your notice pay and final pay items.
- Check your employment agreement. The notice clause (and any clause about paying in lieu) often answers most questions.
- Look at what you usually earn. If your pay varies (commission, variable hours), ask how your employer calculated “ordinary pay” for the notice period.
- Get clarity on the end date. Your termination date can affect your pay cycle, benefits, and even what you tell a new employer.
If something doesn’t feel right, it’s often best to get advice early rather than waiting until the situation escalates.
Key Takeaways
- Payment in lieu of notice is when an employer pays the employee for the notice period instead of having them work it.
- The safest time to use PILON is when your employment agreement clearly allows it, or when both sides agree to it in writing.
- PILON is usually treated as taxable employment income and should broadly reflect what the employee would have earned during the notice period.
- Notice pay is only part of the picture - final pay may also include accrued annual leave and other entitlements depending on the situation.
- Paying notice doesn’t remove the need for a fair and reasonable process when terminating an employee.
- Where exits are sensitive or negotiated, it may be appropriate to document terms in a settlement arrangement so both parties can move on with certainty.
If you’d like help working through payment in lieu of notice, final pay, or a termination process, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
